Sub-Prime loans

Was wondering if any HOAs/POAs have had to deal with a lot of foreclosures due to sub-prime lenders selling to truly unqualified buyers. I realize that necessary regulations in this industry needs to come from the state and federal government, but was wondering if any associations may have come up with some strategies on addressing this issue at the association level. Would welcome any ideas - legal that is.

We have one right now. I heard from a title company recently so it might sell before the auction. We also have one with a collections attorney where it might go to foreclosure to get the money owed.

As of July in Florida, it is illegal for an HOA to interfere with the sale of a house. It wasn't smart before to do it but just about every method that someone might use is no longer allowed. An HOA can't run a credit check on a new owner and doesn't have the right to approve or deny a home sale. An HOA can get any money owed by the old owner and if in the governing documents a setup fee, but anything else is not allowed.

Judith, your association represents an organized voice which can be used to try to influence legislators, your state real estate commission, and others who establish regulations. Unfortunately this would be a reactive action; it would have been more effective as a proactive action a few years ago.

It has created a serious problems here as well as most states. DARCO's CEO has discussed this problem with the head of the Colorado Real Estate Commission and with other real estate brokers. Actions are currently underway to punish appraisers plus the Colorado Real Estate Commission had a major restructuring last year. I think the main culprits may be the mortagage companies who offer these rediculus loans and the uninformed buyers who lose their homes.

Hi Judith:

We have not had a large number of foreclosures, partly due to the demographics of our area (we range from $350k TH/Condos to $1.5 M houses). I read in the national news that there is a growing problem with the sub-prime market, with foreclosures actually endangering or taking down some of the sub-prime lenders.

For what it's worth, my nephew got into the subprime lending business (he's a recent college graduate) but got out after about 4 months, due to his personal ethics. He said that they target people with the allure of having their own homes, but in many cases the people cannot even afford their first payment. It's a cruel way to suck people dry, financially. Luckily, the market forces are dealing with the abusive nature of this business. Unfortunately, in the meantime, there will be many good homeowners affected by this through their HOA losing assessments to foreclosures and bankruptcies.

People end up in the subprime market when they have made poor financial choices that result in low credit scores. The subprime market "works" when there are people who are putting their financial life back in order and are making a choice to purchase a house they can truly afford. It doesn't work when people are still living beyond their means and are making poor financial choices. Ultimately, it's up to each individual to make their own wise choices, so they will not get burned.

J. Patrick Moore, CMCA

Hi again Judith:

I'm not sure that most HOA's can do much with regard to the sub-prime loans; the best effort is to make sure that you have a good collection policy, follow it, and let the lawyers/collection agencies loose when people fall behind enough to qualify under your policy.

It's unfortunate to HOA's that people are getting sucked into home deals that are "toxic" to them. However, everybody is responsible to know what they are getting into, whether that means understanding a 5/1 ARM or reading and understanding HOA documents prior to closing. Ultimately, it goes back to the old saying, "If it seems too good to be true, it probably is." People in the sub-prime market are ususally there either because of an unforseen medical emergency that threw their finances into crisis, because they mismanaged finances and are straightening them out, mismanaged and not straightening them out, or living beyond their means. Too many people have used their homes as a giant ATM machine over the last few years to "refinance" a lifestyle that isn't sustainable.

J. Patrick Moore, CMCA

MellissaP1 - Limiting mortgages based upon geographic areas is targeting and illegal in New Jersey, and may be illegal on a federal level. It's called redlining. Redlining is refusing to make mortgage loans or issue insurance policies in specific geographic areas without regard to the economic qualifications of the applicant.

Foreclosures effect home values. Buyers are savvy to high turnover in an HOA. Homes that foreclose to do defaulting on loans may be a factor if they are on the increase, which they are.

That is true of individuals buying fixer-uppers to flip, but the situation is different with practically brand new homes with sub-prime mortgages that have been lived in 2 years of less. (Two years is usually when the interest rate goes way up and the people cannot afford their new payment.) We have a number like that and then they are vacant for long periods - one for over 3 years. Many foreclosed homes are purchased by the lending institution that holds the mortgage and resold for the price of the mortgage owed plus, but not necessarily at full price.

We bought one such property with our daughter, fixed it up ourselves and she is buying us out in a lease to own agreement. The price we paid, thousands under the comps, went into the comps for that area.

A study in Chicago showed that foreclosures can impact the value of the surround area by thousands of dollars. A local news show had an appraiser on who described one neighborhood with a number of foreclosures and, thus vacant houses, as "distressed." The homes in that neighborhood that were occupied by their owners range were around $500,000 each.

There were 18,000 foreclosures filed in Dallas County during the first quarter of this year. Many of them are not fixer-uppers.

For more on sub-prime loans, check out http://www.responsiblelending.org/

Ohio is taking steps to protect people from the predatory sub-prime market with the implementation of the Homebuyers Protection Act which went into effect on January 01, 2007 and is in the process of "bailing out" people with sub-primes on the verge of foreclosure with low fixed rate mortgages financed by bonds.

THE OHIO HOMEBUYERS’ PROTECTION ACT
— An Overview of Provisions Contained in Sub. SB 185 —
CONSUMER SALES PRACTICES ACT
Expansion of the Consumer Sales Practices Act (CSPA)
• Applies the Consumer Sales Practices Act to mortgage brokers and loan officers employed by non-depository lending institutions
• Subjects an affiliate of a bank or holding company to the CSPA if ownership is less than 25%. This brightline definition for “non-bank mortgage lenders” is consistent with the federal Bank Holding Company Act’s definition of affiliates controlled by a bank or holding company for purposes of regulatory oversight
Protecting the Secondary Market
• Removes assignee liability
• Clarifies that the recovery of damages under the CSPA is only for “actual economic damages”
Other CSPA Provisions
• Addresses frivolous lawsuits by requiring an individual to pay the defendant’s attorney fees if the case is brought forth in bad faith or has no legal merit
• Eliminates the expansion of the CSPA to include “business to business” transactions originally included in the As Introduced version of SB 185
ENHANCED LICENSURE REQUIREMENTS
Appraiser Licensure
• Mandates the licensure of all residential real estate appraisers
National Background Checks
• Requires national background checks for all applicants for mortgage brokers, loan officers and appraisers
• Prohibits an appraiser from obtaining a license who has been convicted of financial-related crimes such as theft, fraud, forgery and money laundering in Ohio or any other state
Loan Officer Examinations and Continuing Education Requirements
• Requires an applicant to successfully pass a licensing examination prior to obtaining a loan officer license
• Eliminates the 90-day provisional period in which an applicant could make loans prior to successfully passing the examination
• Maintains the automatic suspension of licenses for failure to complete continuing education requirements

IMPROVED DISCLOSURE STANDARDS AND PROHIBTED ACTS
Appraiser Coercion
• Prohibits coercion between brokers and appraisers in order to prohibit inflated property valuation
Non-written Promises
• Prohibits non-written promises between brokers or loan officer and customers stating that a loan can later be refinanced at a lower rate in the future
• Requires a written acknowledgement, signed by the customer, be obtained if a promise is agreed to
Details of Monthly Payments
• Mandates clear disclosure stating the full amount of the monthly payments including cost of principal, interest, taxes and private mortgage insurance
• Requires a written disclosure of whether the consumer is required to have an escrow account for taxes
Changes to the Mortgage Loan Origination Disclosure Statement (MLODS)
• Requires timely disclosure of material changes to loan terms, including: type of loan, term of loan, change in rate, change in payment of the principal/interest greater than 5%, change of cash-out exceeding 10%
• Requires any changes to the MLODS to be fully disclosed to consumers within 24 hours after the change occurs or 24 hours prior to the loan closing, whichever is earlier
• Requires mortgage brokers to maintain a signed copy of the MLODS for four years
Notification of Higher Fees
• Mandates that the broker or loan officer clearly disclose if fees associated with the loan are higher than originally discussed
• Requires any excess between the original amount and the new, higher amount be refunded to the consumer if this regulation is not followed 90% Loan-to-Value Warning
• Requires an acknowledged warning on loans expected to exceed 90% of the loan-to-value ratio to ensure borrowers know that if they borrow all, or nearly all, of the equity in their home that it may be difficult to refinance at a better interest rate or sell their home without significant out-of-pocket expenses
Prohibition from Owning a Title Insurance Company
• Prohibits mortgage brokers and/or a member of their immediate family (i.e. spouses or dependents) from
owning or operating a majority interest of a title company
• Grandfathers existing businesses and ownership interest; however, brokers or loan officers are prohibited from referring their customers to a title company in which they have an ownership interest
• Gives the Superintendent of the Division of Financial Institutions permissive authority to either revoke broker licenses or order brokers to divest their interest in the title company for violations under §1322

FIDUCIARY RESPONSIBILITY
Fiduciary Duty of Mortgage Brokers and Loan Officers
• Requires licensed mortgage brokers or loan officers have a fiduciary duty to borrowers and must to act in the best financial interest of their clients
Fiduciary Duty of Lenders
• Extends fiduciary duty to employees of non-bank mortgage lending companies when (1) the transaction
does not involve a mortgage broker and (2) the borrower has less than $25,000 in total net assets
• For this purpose, net assets excludes the equity of the borrower’s home, Social Security, pension values and life insurance policies
INCREASED ENFORCEMENT AND REGULATION
Modify Confidentiality Laws
• Allows the Superintendent of the Division of Financial Institutions, the Superintendent of the Division of Real Estate & Professional Licensing and the Director of the Department of Insurance to more easily share confidential information about registrants or licensees
Public Records Database and Website
• Requires the Department of Commerce to maintain a public database and public website of licensed brokers or loan officers who have been found guilty of any violation, whether it be regulatory or criminal violations
Semi-Annual Reports
• Requires the Director of Commerce to submit semi-annual reports to the governor, speaker of the house, senate president and leaders of the minority party in each chamber detailing the enforcement actions, complaints filed, licensure information and educational outreach efforts by the Office of Consumer Affairs
Direct Enforcement Authority
• Provides the Attorney General and local prosecutors with enforcement authority for criminal violations of §1321 (second home mortgages only), §1322 (mortgage brokers act), and §1349 (predatory lending act)
• Requires local prosecutors to make an initial referral to the Attorney General. Should the Attorney General elect not to pursue the case, he or she shall submit an affirmative refusal back to the local prosecutor; upon receiving the refusal, that prosecutor may take any action
• Ensures all regulatory enforcement actions such as licensure revocation remain under the Department of Commerce; the Superintendent of the Division of Financial Institutions will continue to make referrals to local prosecutors if criminal violations are discovered